* Endowments help to fund scholarships, research
* Africa offers high returns, diversification
* Continent attracting long-term investors
By Tosin Sulaiman
JOHANNESBURG, July 7 America's wealthiest
universities are venturing into Africa's fast-growing frontier
markets in search of outsized investment returns that will allow
them to offer scholarships, lure star professors and fund
For Sub-Saharan Africa, recognition from these deep-pocketed
U.S. institutions, who have often earned envy among fellow
global investors for their strong returns, marks a significant
American university endowments - permanent funds of
educational institutions - pride themselves on spotting new
investment opportunities early, such as venture capital, private
equity and natural resources such as timber. Combined, they
manage assets of over $400 billion.
A study of 831 endowments by the Commonfund Institute and
the National Association of College and University Business
Officers published this year showed their annual net returns in
the 10 years to June 30, 2012, averaged 6.2 percent.
In the same 10-year period, returns for the U.S. S&P 500
stock index were 5.3 percent.
In Africa, they are seeing many of the trends that played
out in emerging markets like China, India or Brazil - strong
economic growth, an emerging middle class, greater political
stability and improved government balance sheets.
These are just the attractions that U.S. President Barack
Obama highlighted on his recent trip to the continent when he
urged American and other investors to "c'mon down" to Africa.
"The growth, consumer spending, improved governance and
disposable wealth, they're all positive stories," said William
McLean, who manages Northwestern University's $7 billion
His team is investing in Nigeria and Kenya among other
countries and recently doubled its exposure to Africa.
"Our motivations are making some money," he told Reuters in
a telephone interview. "You have to look everywhere for growth."
It is difficult to know exactly how many U.S. university
endowments have put money in Africa because most prefer not to
discuss their investment strategy.
Wale Adeosun, founding partner at New York-based investment
firm Kuramo Capital Management, said endowments' interest in
Africa began after the 2008-2009 financial crisis. He estimates
that 10 to 15 percent of these institutions are already
investing in Africa. Up to 30 percent may be seriously looking
for deals there, he says.
"The larger pools of capital are here in the U.S. and you're
seeing the interest picking up about exploring opportunities in
Africa," Adeosun added.
Many endowments are required or aim to channel about 5
percent of their market value to their school's budget each
year, to fund scholarships, research and new campus facilities.
The interest means that Africa is attracting a new class of
investor - those with unlimited time horizons, in contrast to
the speculative hot money that poured into the region before
2008 only to vanish when the global financial crisis hit.
"It's a lot more patient capital and ... the healthy thing
about that interest is that it's likely to withstand the short
term noise around the tapering of QE (U.S. quantitative
easing)," said Razia Khan, head of Africa research at Standard
Besides offering the possibility of cheaper assets and
higher returns that have been hard to come by since the global
financial crisis, Africa along with other frontier markets also
provides more diversification for the investors.
"NOT SUCH A SCARY PLACE"
U.S. endowments' awakening appetite for Africa is another
sign that the continent is shedding its past reputation for
conflict, poverty and aid-dependency in favour of a more
positive image of progress.
Lindel Eakman, managing director of private markets at the
University of Texas Management Company (UTIMCO), told a private
equity conference in Cape Town earlier this year that Africa's
reality is different to what is often reflected by media
"Contrary to the public television out there, it wasn't such
a big, dark, scary place ... We are glad to be here," he said.
Eakman added that UTIMCO, which oversees investments for the
University of Texas and Texas A&M Systems, with assets of around
$25 billion, had made two commitments to Africa through the
private equity firms Helios and Actis.
Besides Northwestern and the University of Texas, which rank
among the ten biggest U.S. endowments, other large schools
investing in Africa include the University of Michigan, the
University of Notre Dame and the University of Wisconsin.
Between them these institutions manage around $50 billion.
Rockefeller University, a biomedical research institute in
New York with around $1.7 billion in assets, expects to make an
allocation to Africa this calendar year and has identified
outside managers, chief investment officer Amy Falls said.
For Indiana-based Notre Dame, Africa accounts for about 2
percent of the $8 billion endowment. This exposure could
increase to 4 or 5 percent in the next five years, said chief
investment officer Scott Malpass.
"We've done a lot in China, Brazil, India. As Africa
continued to evolve it was just a natural area for us to spend
time there," he said, adding that rising incomes and the
improving quality of businesses in Africa were big draws.
Harvard University, whose $31 billion endowment is the
biggest in the United States, has been exploring the investment
landscape in Africa, according to a banking source who said his
bank was approached by the university a few months ago.
"There has been some interest," he said. "They were looking
to debt instruments and private equity." According to Harvard's
tax filings for the year ending June 30, 2012, the university
had investments of about $198 million in sub-Saharan Africa, but
this represented just 0.5 percent of its total investments.
CHASING 8 PCT RETURN
Those who have taken the plunge into Africa are treading
cautiously, concerned about political risk, corruption and the
relative immaturity of markets in the region.
"This is a long term process. We're looking out 15, 20 years
so we're starting slow and proceed with caution," said Tom
Olson, who oversees the University of Wisconsin Foundation's
$2.1 billion endowment, which has commitments with Actis.
Investors are also gaining comfort from the "slowly
increasing" number of good quality managers handling deals in
Africa, said a senior private equity executive who said at least
five endowments had made commitments to his firm's latest fund.
"They expect who they give money to be of the same quality
as the teams they give money to in the U.S. and Asia," he said,
asking not to be named.
The small size and illiquidity of the region's capital
markets are another worry, especially for the richest
universities whose assets can dwarf the GDP of smaller African
"If everybody goes in and starts trying to buy things it's
going to move the prices and grab the value away so you can't go
in and take a big position," said Bill Jarvis, managing director
of the Commonfund Institute, the research arm of Commonfund,
which manages over $24 billion for more than 1,500 institutions.
Kuramo Capital's Adeosun said universities recognise the
need to consider frontier markets like Africa if they want to
meet their return objectives.
"You have to make 5 percent plus inflation plus expenses,"
said Adeosun. "They're all chasing an 8 percent type return."